Educational Articles

The Movie Theater, Redux

Robert Harrington
| May 20, 2012

When it became clear that 2011 would boast some of the most abysmal numbers in recent box office memory, analysts and jaded filmgoers alike bewailed the future of the cinema. With 15-year lows in attendance and a growing public preference for on demand home-viewing, pioneered by video-streaming site Netflix (NFLX) and home theater producers like Panasonic (PC), the outlook was exceptionally dim. Hollywood’s recent output, a largely regurgitated assortment of buddy comedies, over-the-top action films, and insufferably contrived romantic comedies has long been a source of consternation for the ticket-buying public. In 2011, as the Avatar-effect indirectly inundated theaters with hastily-converted 3D pictures, the industry as we know it looked like a faint version of itself.

Then, in the first quarter of 2012, propelled by the big-screen success of several pictures, theater companies posted across-the-board blockbuster results, catalyzing a new hope in movie theaters’ chances of contending with innovative technologies and viewing options.

The Return to the Theater

Regal Entertainment Group (RGC) runs the largest domestic theater chain in the country, through once-sovereign subsidiaries like Regal Cinemas and United Artists Theaters. A little over a decade ago, the company was formed as a loose arrangement of several defunct chains which, in the multiplex boom of the 1990s, all declared bankruptcy after years of overzealous expansion. Entrepreneur Philip Anschutz birthed the newly-formed company in 2002, and since then the company has maintained a steady cash flow, allowing it to pursue major projects to better equip its theaters with up-to-date features, such as mobile ticketing, in-house screen advertising (primarily through National Cinemedia (NCMI), of which RGC owns a non-controlling percent of shares), and, most recently, a nearly-complete digital conversion of each of its 6,700+ screens. The latter is perhaps the most vital to continued success, as a digital footprint will allow the company to supply additional showtimes for popular pictures based on audience demand.

Like Regal, Cinemark Holdings (CNK) has looked outward at the industry to determine filmgoing habits and preferences of its audience to increase its profitability. While also moving forward with a digital conversion, the Plano, Texas-based company has placed increased importance on attendance growth in foreign markets. By expanding into Mexico, Brazil, and China, where the April re-release of Titanic (produced by Paramount Pictures, a subsidiary of Viacom (VIAB))grossed over $60 million in its opening weekend, Cinemark targeted lucrative markets which have yet to be fully taken advantage of. The company plans to have a majority of their screens located in these emerging regions when all is said and done.

These initiatives, implemented in accordance with weakening domestic attendance and major studios’ decision to phase out film in favor of the cheaper digital product, signifies a business strategy that is wholly contradictory to the aggressive overextension that doomed the industry just ten years ago. As studios are continuously changing the way they make movies to better operate and succeed, the two companies have led the way in showing that theaters must display forward looking versatility, as well. In other words, as consumers are offered more convenient and cost-effective viewing options, the movie theater can no longer rest on its laurels and expect to fill seats.

The Silver Screen Strikes Back

Yes, higher ticket prices and the premium surcharges attached with viewing a 3D or IMAX (IMAX) film likely played a major part in inflating these results; but people have long griped about the cost of seeing a film in theaters, so why now are audiences seemingly chomping at the bit to fill theaters? One answer lies in the quality of the 2012 film slate which, in addition to being commercially viable, looks to be more laudable in press and person than in previous years. Marvel’s The Avengers (Disney (DIS - Free Disney Stock Report)) and The Hunger Games (Lionsgate (LGF)), so far the year’s biggest hits, combined for nearly one-fifth of the year-to-date’s box office gross. The films also inspired the type of fan-boy enthusiasm and positive word of mouth studios dream of. And when The Dark Knight Rises (Time Warner (TWX)), whose predecessor shattered many of the records Avengers recently challenged in addition to scoring two statues at the 2009 Academy Awards, some are expecting even more robust figures.

That studios and filmmakers are better utilizing the immersive technology to propel The Hunger Games and The Avengers record breaking releases is evidence that there is plenty room for theater companies to cash in record film grosses. The two films, the upcoming Batman installment, and a handful of other big ticket releases enlist IMAX technologies, creating the possibility that the top-5 highest grossing films at year end could all be aided by the Toronto-based Corporation’s benchmark product. Hoping to cash in further on IMAX’s success, both Regal Entertainment and Cinemark have introduced new technologies to further strengthen operating margins within the past year. The IMAX-esque RPX and XD aim to keep operations in house, rather than the standard profit-sharing or joint-venture agreements IMAX typically enters with its partners.

A New Hope?

Cinemark and Regal, as well as the smaller Carmike Cinemas (CKEC), have enjoyed earnings outperformance in recent quarters due to stronger operating margins and the screening flexibility afforded by the near-complete digitalization process. Yet, as these companies are inextricably linked to the performance of the domestic and global box offices, it is impossible to project how they will perform out three- to five-years; still, the upcoming year is a promising one for the movie theater industry, with high-profile releases set to become blockbusters and inject new life in the big-screen.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.